Tony Abbott has expressed his "deep and sincere regret" for the embarrassment caused to Indonesian President Susilo Bambang Yudhoyono by revelations Australia had tried to tap his phone.

"I want to express here in this chamber, my deep and sincere regret about the embarrassment to the President and to Indonesia that's been caused by recent media reporting," Mr Abbott said in a speech to Parliament on Wednesday evening.

Indonesian President Susilo Bambang Yudhoyono announces an end to co-operations with Australia in Jakarta on Wednesday.

‘‘Obviously there are very seriously issues that do need to be worked through in the near future between us."

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He said he was "encouraged by the President’s remarks about the strength of the relationship between Australia and Indonesia"

Mr Yudhoyono dramatically upped the stakes in the war of words on Wednesday, ordering his country's troops to stop joint exercises with Australians in Darwin and also to stop any joint patrols to combat people smuggling.

He said they would remain suspended until he has obtained an explanation and an acceptance of "responsibility" from Mr Abbott about phone tapping.

“How can we do all this if we are not sure that there is no tapping on our military, who are working for the interests of the two countries?

“God willing, tonight I will send a letter to Tony Abbott demanding Australia's official stance and explanation on the tapping incident, in order to get a response. And then we will see what we can do in the future.”

Dr Yudhoyono said he asked for three things from Australia.

Firstly, “We are waiting for the clear explanation and for Australia to take responsibility over the tapping,” he told journalists.

Secondly: “Several areas of cooperation will be reviewed, or I have asked for them to be temporarily stopped — co-operation in information sharing and the exchange of intelligence. I have also asked my military to temporarily stop the joint army and navy exercises [with Australia] and also to temporarily stop any co-ordinated military operations, the joint patrols.

“As you know the people smuggling issue has troubled both Indonesia and Australia, so we have co-ordinated military operations, or co-ordinated patrols in the ocean, but until this issue is all clear, it will be stopped.”

Thirdly, he called for a binding code of conduct between Australia and Indonesia about future co-operation.

This would cover joint military exercises, Indonesia and Australia, co-operation on people smuggling and on the exchange of information and intelligence.

The Indonesian president also praised Australia for its clear recognition of Indonesia's sovereignty, saying it was “important political capital for cooperation today and into the future”.

“We have to overcome this problem with rationality and then we will make a new agreement so that we can move into the future in cooperation,” he said.

The Indonesian President asked his countrymen and women in Australia, be they diplomats, workers or students to, “remain calm and keep on working and studying because the Indonesian government as well as Australian government have the duty and responsibility to overcome this problem”.

After describing the many ways in which Australia and Indonesia cooperated, Dr Yudhoyono said that to him personally the decision by Australia to tap his personal mobile phone and that of his wife and their inner circle was "difficult to digest".

"It is no longer the Cold War era. It was a common thing then to spy on countries of different blocs, but today it is not like that anymore.

Hostile countries can tap each other, but between Indonesia and Australia we are not of different blocs, let alone hostile each other ... why tap a friend not foe?

"That's why I take this matter seriously, not only from the legal point of view be it Indonesia's legal point of view but also Australia's and the international's this [tapping] violates [all laws] including human rights. This is about the morals and ethics of a good friend."

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Australian intelligence agencies have promised to stop phone tapping Indonesians, the Indonesian intelligence chief has said, as reports emerge that Indonesia has downgraded its official relationship with Australia.

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It's time for Tony Abbott to seize the middle ground and try to defuse the escalating tensions with Indonesia by giving Susilo Bambang Yudhoyono a simple assurance that Australia isn't trying to intercept his private phone calls.

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Tony Abbott should apologise to Indonesia without delay. Even more importantly, he should establish a wide-ranging inquiry, preferably a royal commission, into Australia's intelligence and security agencies.